Investing in Small Apartments for Monthly Income
Many real estate investors today are looking for ongoing income, especially as they grow closer to retirement age. One of the best types of income-producing investments is the smaller apartment building.
Let’s consider the nuances of this type of purchase…
We usually define a smaller apartment building as one that contains 5-10 units. Anything below five units is either a multi-family or single-family property.
Anything above that number is considered a larger apartment building.
Advantages of a Small Apartment Building
The smaller apartment building has many advantages over its larger counterpart. First, and most importantly, it is cheaper to own because the down payment is lower and ongoing maintenance costs are less.
Smaller apartments are easier to manage than the larger ones, and there is usually a better rate of return, as each unit derives more in rent.
Financing a property that is greater than four units requires a commercial, rather than a residential loan. Banks often require a 25% down payment, but there are also deals where a motivated owner is selling privately and is willing to hold the mortgage and take a smaller down payment.
However, even with owner financing, there is usually a balloon payment due within 10 years or less, so eventually, you still have to refinance with 25% down.
Distressed Properties – Yes or No?
In my area of Northeast Florida, there were some spectacular deals on smaller apartment buildings from 2009-2011 when the recession was in full force. But with so many people unemployed, the units were often 80% or 100% vacant, and that’s why these distressed properties were being sold so cheaply.
“While the cost-savings of buying a distressed property are attractive, it’s important to remember that these types of properties sometimes come with risks,” said Rick Sharga, Executive Vice President of Ten-X, an online real estate marketplace.
“Successful investors don’t exclusively focus on the acquisition cost; they also look at estimated profits from cash flow and the long-term potential of a property.”
So when you’re buying a distressed apartment, you may have to ride out the bad times while simultaneously improving the building in an effort to attract good tenants down the road.
I know one South Carolina investor who recently sold an apartment complex he bought a…
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